EUR sell on rallies, weaker CNY

December 11, 2012 — Mitul Kotecha

Ahead of several major events over coming days including the Fed FOMC meeting, EU Summit and Japanese elections the market will continue to appear directionless. Indeed, there was little influence overnight, as markets digested news of Italian Prime Minister Monti’s resignation, with the reality that this merely took place earlier than expected limited any damage. Discussions on the fiscal cliff were ongoing but with no sign of breakthrough as officials noted that the lines of communication remain open.

On the data front the German ZEW survey will be the main highlight for Eurozone markets today, with a likely small improvement set to provide marginal relief to the markets. A conference call by the Eurogroup to discuss Greece is also on tap as any news about the progress of Greece’s debt buyback and aid tranche is awaited. In the US a small narrowing in the October trade deficit is expected but small business optimism is likely to have deteriorated in November. The data and events today will leave markets largely unperturbed.

EUR managed to recoup some of its losses after dropping to a low around 1.2880 versus USD which is a strong support level. EUR/USD continues to look like a sell on rallies, with any break above 1.3000 likely to find strong selling interest. A slightly firmer ZEW survey and potentially positive comments about Greece may help limit any pressure, however. USD/JPY continues to look stretched to the topside as indicated by extreme short JPY market positioning although reports that the Bank of Japan are preparing further monetary stimulus at its meeting next week will limit any retracement.

Asian currencies remain supported although the weaker CNY over recent days will likely undermine closely correlated currencies including KRW and TWD. Nonetheless USD/KRW dropped below the psychologically important 1080 level, with the Bank of Korea smoothing rather than stemming any appreciation in KRW. Markets remain wary of more regulations on the KRW while the weaker CNY will also contribute to acting to resist further KRW appreciation in the near term. The IDR was the major underperformer in the region but comments by the central bank governor about guarding the currency will fuel caution about further selling.

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Fade gains in the euro

November 27, 2012 — Mitul Kotecha

The USD’s drop over recent days has almost wiped out half its rally since October 17. Only the JPY has lost ground over this period. More modest weakness is in prospect for the USD in the short term although I do not look for the currency to drop sharply. Given their strong correlations with the USD index any decline will bode well for EUR, GBP, SEK, CHF, CAD and several emerging market currencies.

Most commentators are ascribing USD weakness to the improving risk appetite but the USD index has maintained a low sensitivity to my risk aversion barometer, suggesting that the relationship is tenuous at present. The reality is that there is probably a bout a profit taking rather than any major shift in USD sentiment and this is set to continue for the time being.

EUR/USD’s impressive resilience over recent weeks highlights the hurdles to anyone wanting to short the currency. Underling EUR support remains firm as reflected in the recent turnaround in the Eurozone basic balance position (direct investment + portfolio flows + current account) while there may also be an element of FX reserves recycling flows providing support of the EUR.

Additionally the market has been giving Eurozone officials the benefit of the doubt with regard to a Greek debt sustainability solution and the lacklustre reaction of the EUR following the Greek deal this morning highlights that much was already priced in. The deal which effectively lowers interest rates that Greece has to pay on its debt while giving it more time to pay the debt paves the way for a EUR 34.4 billion loan tranche in December.

Finally, the threat of ECB Outright Monetary Transactions (OMT) activation continues to threaten to provide a major back stop to any EUR pressure. At current levels the upside for the EUR looks far less compelling. I suggest taking profits / fading the rally on any test of resistance around EUR/USD 1.3030 and EUR/GBP 0.8120.

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Edging away from the cliff

November 20, 2012 — Mitul Kotecha

Risk appetite was decidedly firmer overnight as hopes of a US budget deal grew. Talks between President Obama and Congressional leaders have been labelled as ‘constructive’ implying some sign of compromise although there is a long way to go before a deal is likely. Sentiment was boosted further by encouraging housing news out the US, with home builders’ confidence and existing home sales beating expectations. Unfortunately housing starts data today will not be as upbeat.

News that France’s credit ratings were cut by Moody’s dampened the mood, ahead of a meeting by Eurozone officials to decide on the fate of Greece’s EUR 31.5 billion loan tranche. The French downgrade may cast a shadow over markets this morning but hopes of progress towards a solution to the fiscal cliff will keep markets buoyed.

Data releases in the Eurozone will do little to help the EUR given expectations of weak purchasing managers’ indices and a yet another drop in the German IFO business confidence survey over coming days. News on the Greek front might be a little better if the country’s loan tranche is approved today. However, any boost to EUR sentiment will be short lived as discussions about Greece’s sustainability and disagreements among its creditors hog the limelight.

My quantitative models suggest little directional bias, with EUR/USD close to its short term fair value. While all of this suggests that the EUR will fail to find much momentum its worth highlighting that EUR short speculative positioning is at its highest since 11 September and a great deal of bad news is already priced in.

While the Bank of Japan is set to deliver more easing over coming months today’s meeting will likely mark a pause in policy. I do not expect any surprises from the Bank of Japan today but the JPY remains on the back foot in the wake of calls for “unlimited easing” by the opposition LDP party. However, the outcome of elections is by no means clear cut and although the LDP will likely garner the lion’s share of the vote its policies may be constrained by coalition partners.

I remain cautious of calling the JPY higher from current levels, especially given that USD/JPY will be undermined somewhat by the drop in US bond yields. Moreover, my quantitative model shows a sell signal for USD/JPY. Technical resistance around 87.78 will likely cap any up move in the currency in the neat term.

Posted in Bank of Japan, Greece, Japan, US administration. Tags: , , , . 2 Comments »

Sell into the USD/JPY rally, EUR bottoming out, GBP vulnerable

November 19, 2012 — Mitul Kotecha

Following a week when risk measures continued to worsen there may not be much respite over coming days. The usual suspects will continue to direct sentiment including US fiscal cliff discussions, Greece’s next loan tranche and debt sustainability, the timing of any possible Spanish bailout request, and the conflict between Israel and Hamas in the Gaza strip. Added to this list are worries about economic growth.

Data releases this week are expected to be soft in general, with US existing home sales set to slip in October, weak readings for Eurozone flash purchasing managers’ indices and an eight consecutive drop in the German IFO business climate survey in November. Trading conditions will likely thin over coming days as the US Thanksgiving holiday on Thursday approaches.

Events over coming days will at least give further clues on the monetary policy front, with Fed Chairman Bernanke scheduled to give a speech at the Economics Club of New York, an event which may shed some light on Fed policy once Operation Twist ends. In the UK Bank of England minutes will also be scrutinised for clues on more QE, with a likely split decision set to be revealed. GBP continues to suffer from a bad combination of weak activity and higher inflation, leaving the currency vulnerable to further selling, especially against EUR.

Additionally, the Bank of Japan will decide on policy although a pause is expected this week given that easing measures were only announced at the last meeting at the end of October. The general election on December 16 may also complicate BoJ policy. USD/JPY’s upside potential looks limited from current levels and a lack of action from the BoJ tomorrow will likely undermine the current pair further. USD/JPY will find strong resistance around 81.78.

In Europe policy decisions will focus on developments in Greece, with the next loan tranche for the country to be decided and discussions on the 2014-2015 EU budget set to take place. The loan Greek aid discussions tomorrow ought to lead to an agreement to distribute EUR 31.5 billion in aid to Greece. The decision may help the EUR to edge higher, although EUR/USD will need to break above its 200 day moving average around 1.2807 before it can register more concrete signs of recovery.

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Peering over the cliff

November 16, 2012 — Mitul Kotecha

As the US edges closer to falling off the fiscal cliff budget discussions between US President Obama and Congressional leaders commencing today will garner most attention. Conciliatory signs from both sides suggest some attempt at compromise but tough starting points mean that it will not be easy to match rhetoric with reality.

Markets are clearly in nervous mood, with US stocks closing lower as risk aversion edged higher. Disappointing earnings from Wal-Mart Stores taken together with a weaker than anticipated Philly Fed survey in November and weekly jobless claims added another layer of negativity to the market. Despite the US-centric fiscal cliff risks the USD remains firm although notably its pace of appreciation has slowed, with the currency likely to make little headway in the near term.

Although unsurprising, data in Europe confirmed that the region fell back into recession, an outcome that will do little to ease tensions. Hopes of a final agreement on Greece’s loan tranche at next week’s Eurogroup meeting may however, limit any damage to Eurozone markets. The EUR has shown signs of bottoming out and may take further advantage of the respite from a more restrained USD. There is little of interest on the data front today, with Eurozone current account data, US industrial production and TICS flows the main highlights.

On the political front the dissolution of parliament in Japan is the highlight, with markets continuing to push the JPY lower as expectations of more aggressive action after elections to the weaken the currency grow. The fourth consecutive downgrade of Japan’s economic assessment by the government highlights the urgency for such action.

Asian currencies are finding a little more resistance to further gains as the appreciation of the CNY has stalled over recent days. The most sensitive currencies to the CNY including KRW and TWD will likely face most resistance to further gains. In contrast those currencies that are more USD sensitive including INR and MYR could take advantage of any pause in USD index gains.

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